Macquarie downgrades expectations, guides to lower investments income

Shares in the banking major sink as it downgrades expectations for its asset management, investment banking and global trading units after a weak first quarter.

Macquarie Group CEO Shemara Wikramanayake at their Sydney offices. Picture: John Feder/The Australian

Macquarie Group has downgraded earnings guidance for its asset management, investment banking and global trading units, saying it expects lower investment related income amid a still weak environment for M&A deals.

In a trading update ahead of its annual general meeting, Australia’s largest investment and banking conglomerate said first quarter earnings had been significantly lower compared to the bumper first quarter last year.

Stronger results from its lending business in Australia had not offset “substantially” lower investments, trading and fee income.

The update was far more gloomy than what analysts and investors were expecting, with Macquarie shares sinking as much 5.17 per cent to $173.55 before recovering to close 4.4 per cent lower at $175.03 each.

A string of asset sales last year by its Green Investment Group, which since 2021 is part of its asset management unit, and trading revenue from its commodities business last year had not repeated, leading to the drop in earnings in the first quarter.

Macquarie Asset Management (MAM) funds under management had also dropped slightly to $864bn as of the end of June, with gains from higher public markets only partially offsetting “net flows”.

That weaker flow reflected some investor caution on public markets and the fund raising schedules of that business, chief executive Shemara Wikramanayake said.

“Looking forward from here … in the asset management business we expect the base fee to be broadly in line … but net other operating income we expect to be substantially down,” she said.

“And that’s mainly because we expect lower investment related income from the green energy investments,” she said.

The company did not release earnings numbers, but analyst at Citi said it was likely earnings had come below its $1bn forecast for the quarter.

“We had estimated quarterly earnings of about $1bn, about 25 per cent down on the previous comparable period, reflecting the cycling of strong gains, but it appears that earnings have printed below this estimate,” the broker said.

“It appears that management is anticipating further weakness through financial year 2024. Investment-related income expectations have been downgraded across both MAM and Macquarie Capital, reflecting a tougher environment for deal flow,” Citi analysts wrote in a note to clients.

The silver doughnut said commodities income from its Commodities and Global Markets (CGM) unit – its largest contributor to earnings last year – would be “broadly in line” and not “up” from its 2022 financial year, as it had said in May. 

With uncertainty about inflation and high interest rates hurting mergers and acquisition volumes and investment banking revenues globally, Macquarie Capital had also seen lower fees and commission income.

That was only partially offset by higher income from its private credit portfolio.

Investment income in 2024 at MacCap would be “broadly in line” with the result last year, which was a downgrade from the “significantly up” guidance it gave in May.

Its Banking and Financial Services (BFS) unit had posted stronger earnings in the quarter, reflecting its solid growth in loan volumes and healthy margins. That was still expected to continue, it said.

UBS analysts said the update would likely result in a 15 per cent downgrade to earnings forecasts for the first half of 2024.

Macquarie said its short term outlook guidance was subject to global economic conditions, inflation, interest rates and the impact of geopolitical events.

Former Reserve Bank of Australia governor and now Macquarie chairman Glenn Stevens said bringing global inflation down would be a “slow and difficult process”.

“We have had some better news just recently in the US, which is important, but it‘s only one monthly figure,” Mr Stevens, who headed the RBA for ten years until 2016, said referring to the slower US inflation rate of 3 per cent in June, down from 9 per cent a year earlier.

Despite that, the Federal Reserve hiked interest rates overnight by a quarter of a percentage point to a range of 5.25 per cent to 5.5 per cent, a multi-decade high.

“I think central banks everywhere are grappling with the question, have they done enough, and how can you tell when you’ve done enough?” he said.

“My own feeling for what is worth is inflation is going to come down, but it’s going to be a slow and difficult process that will take a while. “

In Australia, June’s inflation rate of 6 per cent, down from 7 per cent in March, is fuelling hopes the central bank might consider leaving rates on hold at 4.10 per cent at its next policy decision next week.

Mr Stevens also said Macquarie’s record $5.2bn profit last financial year was an “exceptional outcome” that reflected the long-term value of the firms’ diversified business.

“While last year’s record result was partly generated by unusual circumstances, the long-term trend in earnings reflects management’s efforts over many years in building valuable franchises,” he said.

“The Group delivered a … return on shareholders’ equity of 16.9 per cent. This was an exceptional outcome, achieved by a high-performing management team who deliver for shareholders by delivering for clients,” he said.

The company had $10.8bn in excess capital, down from the $12.6bn surplus it had in March.

Mr Stevens also defended the millionaire pay of commodities and markets boss Nick O’Kane, who raked in a $57.6m package for the 2023 financial year. 

“The (pay) structure has been in place for a long time (and) the outcomes that we’ve decided on this year are wholly consistent with that framework that we’ve had for a very long time,” he said.

The company said it would replace former PwC acting CEO Kristin Stubbins as its lead auditor with PwC partner Voula Papageorgiou.

Ms Stubbins was demoted to the role of Strategy and Transformation Leader in June when global PwC leader Kevin Burrowes took over as head of the scandal-hit firm in Australia after the former head of tax shared confidential government briefings with colleagues and clients.

The replacement reflected “the new role that Kristin Stubbins has in PwC and the time it’s required to conduct an audit of an organisation like ours,” said chief financial officer Alex Harvey.

The bank announced last year that it would review the role of PwC as its auditing firm as part of a regular 5-yearly process. That review will be thorough and “it will take culture of reputational matters” into account, Mr Harvey said.

The company also announced a new board position. It said former Standard Chartered executive David Whiteing will be appointed non-executive director of its banking unit, Macquarie Bank Limited.

Originally published as Macquarie downgrades expectations, guides to lower investments income